Buy-to-let landlords are witnessing a significant increase in their investment returns, despite the challenges of rising costs. An in-depth analysis by Octane Capital has uncovered that rental yields have climbed over the past two years, creating a lucrative scenario for property investors despite a backdrop of economic turbulence.
Rising Rents, Rising Yields
According to the specialist lender Octane Capital, the average yield on buy-to-let properties has increased from 4.9% to 5.8% within a two-year span. This increase reflects a broader trend of rising rental incomes, which have reportedly jumped by 19% during the same period. Despite this increase in income, landlords are facing escalating operational costs, primarily due to higher mortgage rates associated with buying and letting properties. However, these costs have not yet overtaken the gains from rental income, allowing landlords to enjoy a net positive growth in their investments.
Jonathan Samuels, CEO of Octane Capital, highlights the resilience of the rental market. He states, “The average landlord has benefited from a very healthy level of rental income growth in recent years. While the capital appreciation on their property may have cooled, the returns from rental income have kept their investments in the green.” Samuels also notes that although higher mortgage rates have dampened net profits, the overall impact remains minimal considering the economic climate and the ongoing property market uncertainty.
A Closer Look at Rent Trends
The Office for National Statistics (ONS) corroborates the rise in rental prices, showing a steep 9.2% increase in average rents across the UK in the year leading up to March 2024. This marks the largest annual increase since 2015, with a consistent upward trend across England, Wales, Scotland, and Northern Ireland. The persistent demand for rental homes far outstrips the supply, a situation that has kept rental inflation high.
Richard Rowntree, managing director of mortgages at Paragon Bank, emphasises the root of this inflation: “The increase in private rental inflation is driven by a supply and demand imbalance seen in many parts of the UK.” He points out that while tenant demand has slightly decreased from record highs last summer, the competition for rental homes remains fierce due to ongoing population growth and household formation.